What 2016 brings for Southeast Asia

The new year 2016 will be an interesting year for Southeast Asia as the region finally implements the ASEAN Economy Community (AEC), some countries brace for possible changes in government and others prepares for volatility in the wake of rising tensions in the South China Sea, the risk of terrorist attacks, the stubbornly low oil price, China’s economic slowdown and potential capital flight due to rising US interest rates.

ASEAN Economic Community

The official establishment of the AEC and its regional free trade zone should point to further growth ahead for Southeast Asia, with its 630 million consumers potentially becoming the world’s fourth-largest economic bloc by 2050. The International Monetary Fund expects the “ASEAN 5”, consisting of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, to post a combined 4.9 per cent GDP growth in 2016, although stronger growth is expected for ASEAN as a whole, with the OECD estimating an average of 6.2 per cent annually through to 2020. HSBC economists expect the AEC to add at least 5 per cent to the region’s economic size by 2030, while BMI Research suggests ASEAN’s share of global GDP could grow from 3.2 per cent to reach 4.7 per cent by 2023.

However, individual challenges remain and thus the growth projections are to be viewed with caution.

Philippines

In the Philippines, there is risk of election-related violence ahead of the May general election and uncertainty of the new administration’s economic policies. As Filipinos prepare for the election, political violence remains a possibility leading up to the poll date. A gun ban will start on January 10, 2016 to reduce election-related violence, but political violence remains a risk.

What happens after the election is also crucial. Whether the new government will continue with the existing economic agenda and anti-corruption efforts remains uncertain. Rodrigo Duterte, the hardline mayor of Davao City, Jejomar Binay, vice president and member of the opposition party, Senator Grace Poe, and presidential-pick Manuel “Mar” Roxas are leading the opinion poll.

Changes of the economic agenda are most likely to come from an administration lead by Binay, who is mired in corruption allegations. If Duterte wins, the country could see a massive police build-up which could deter investors.

Thailand

Thailand will most likely not return to democracy in 2016. While the absence of elections will continue to test voters’ patience, massive violent demonstrations remain a low possibility, but small protests are likely to occur in the short and medium term. The currently ruling junta is likely to continue with what it calls political reforms, including presenting another new Constitution.

Economically, growth is expected to remain sluggish. While the AEC is to become an opportunity for Thai companies and banks to expand in the region, there are widespread fears of new competition in the labour market from outside due to the very low English proficiency in the country. The English abilities of Thais are ranked 14th out of 16 countries in Asia and 62nd out of 70 countries worldwide.

Myanmar

Besides the formation of a new government, the challenges Myanmar faces as it faces the AEC are formidable. Along with Cambodia and Laos, Myanmar has been granted an extension and will not fully join the AEC until 2018, but economists say even this target may be hard to meet as the country’s economic infrastructure remains weak.

Poor infrastructure is a major barrier to competitiveness. Myanmar is rated 145 out of 160 countries in the World Bank’s 2014 Logistics Performance Index – the lowest score in Asia. This will keep putting it at a disadvantage in the region. A lack of skilled labour, combined with outdated economic policies, investment laws and weak law enforcement will set Myanmar back even further, economists say. Much of that wil have to be addressed by the new administration.

Laos

Laos is to chair ASEAN throughout 2016. As a landlocked country, Laos has been an active supporter of regional economic integration. But its ability to lead the regional bloc is undermined by lack of political weight.

Laos is tasked to oversee trade negotiations on some of the most controversial goods and services which were not reached even under the former ASEAN chair, Malaysia, which is considered to have much stronger leadership. Laos also has limited political tools to resolve disputed issues during its chairmanship.

Furthermore, with its close political ties to China underpinned by Chinese infrastructure investment, it may limit Laos’ ASEAN leadership amid rising tensions over competing sovereign claims in the South China Sea and slow down ASEAN’s progress towards achieving a full community. A joint ASEAN stance on the territorial issue is unlikely to happen under Laos’ lead.

Singapore

Singapore’s economy expanded a mere 2 per cent in 2015, the slowest pace in six years. Looking ahead, challenges in the external environment could put more downward pressure on the city state’s economy.

The slowdown in China is expected to further weigh down on Singapore’s overall manufacturing as well as GDP growth, at least for the next six to nine months. Then, it also has to consider the potential drag of higher interest rates arising from the US’ monetary policy normalisation process.

In addition to a cyclical downturn in the global commodity and manufacturing sectors, Singapore’s small and trade-dependent economy is also grappling with a domestic restructuring effort that aims to foster greater productivity-driven growth.

Indonesia

In Indonesia, the main external challenges that are expected to persist in 2016 are further monetary tightening in the US, China’s economic slowdown and low commodity prices. Although the country’s economic growth is projected to accelerate to 5.3 per cent year-on-year in 2016 from 4.7 per cent in 2015 (the fifth consecutive year of slowing gross domestic growth expansion), this growth is primarily caused by improved government spending.

The economy of China has a major impact on the Indonesian economy as China, the world’s second-largest economy, is the key trading partner of Indonesia. With regards to low oil prices, for Indonesia this situation is problematic as the country relies heavily on exports of raw commodities.

Vietnam

Vietnam, in turn, is on an unprecedented growth trajectory. In 2015, the country signed free trade agreements with South Korea and the European Union. Negotiations on the Trans-Pacific Partnership agreement concluded and the AEC was launched. Vietnam posted GDP growth of 6.68 per cent in 2015, the highest in eight years.

Economists expect that the trade agreements and the AEC will help Vietnam boost growth, create new jobs, increase incomes, reduce poverty, stimulate exports, attract foreign investment, restructure its economy, and increase its competitiveness in achieving sustainable growth. Vietnam is implementing a policy of economic transparency and improving its business environment, and restructuring its economy to maintain a 6.5 to 6.7-per cent growth rate over the next five years. A big boost is also expected from the country’s newly opened, booming real estate market.

Cambodia

Global and regional economic dynamics are likely to pose challenges for Cambodia’s economy in 2016, the National Bank of Cambodia said. Robust US growth and the end of low interest rates, economic slowdown in China and Europe, as well as increasing regional competition are expected to test Cambodia’s macroeconomic resilience.

Higher interest rates in the US will strengthen the dollar – and therefore make Cambodia’s dollar-pegged exports internationally less competitive. Adding to this, the increased minimum wage in the garment sector, increased competition after the implementation of the Trans-Pacific Partnership, the free trade agreement between Vietnam and the EU, the economic liberalisation in Myanmar and the AEC all have the potential to weigh on Cambodia’s regional competitiveness. However, GDP growth forecast is still a healthy 6.9 per cent for 2016.

Malaysia

Apart from political turbulence revolving around alleged misuse of state funds by the current government, Malaysia is faced with rapidly rising cost of living. In a situation where the nation’s revenue has shrunk mainly because of the global fall in oil prices, both the public and private sectors will not be able to sustain their current level of employment, and growing unemployment will further erode the economy in a vicious cycle. The new Goods and Services Tax, which was implemented in April last year, also had a negative impact on consumer spending.

Stimulating domestic production, supporting and strengthening the role of small and medium-sized enterprises through assistance for research and development, and enabling cooperatives to participate more meaningfully in various sectors of the economy are measures to be taken to improve the situation, economist believe.

From a peak in the first quarter, private consumption has been steadily falling in tandem with consumer sentiment, with consumer confidence falling to lows seen during the global financial crisis of 2008/2009. The first-half of 2016 could be especially challenging given that households would be facing new rounds of cost pressures from electricity and utilities, as well as from hikes in public transportation fares and highway tolls.

Brunei

Brunei Darussalam is the ASEAN country hardest hit by low oil prices and will have to completely restructure its economy if this low price level is to persist. Due to failed diversification efforts, there is not much other industry than oil on which Brunei could build to retain its wealth. The country is already running big budget deficits and is facing its fourth year of economic depression in 2016. See the full analysis here.

The new year 2016 will be an interesting year for Southeast Asia as the region finally implements the ASEAN Economy Community (AEC), some countries brace for possible changes in government and others prepares for volatility in the wake of rising tensions in the South China Sea, the risk of terrorist attacks, the stubbornly low oil price, China’s economic slowdown and potential capital flight due to rising US interest rates.

ASEAN Economic Community

The official establishment of the AEC and its regional free trade zone should point to further growth ahead for Southeast Asia, with its 630 million consumers potentially becoming the world’s fourth-largest economic bloc by 2050. The International Monetary Fund expects the “ASEAN 5”, consisting of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, to post a combined 4.9 per cent GDP growth in 2016, although stronger growth is expected for ASEAN as a whole, with the OECD estimating an average of 6.2 per cent annually through to 2020. HSBC economists expect the AEC to add at least 5 per cent to the region’s economic size by 2030, while BMI Research suggests ASEAN’s share of global GDP could grow from 3.2 per cent to reach 4.7 per cent by 2023.

However, individual challenges remain and thus the growth projections are to be viewed with caution.

Philippines

In the Philippines, there is risk of election-related violence ahead of the May general election and uncertainty of the new administration’s economic policies. As Filipinos prepare for the election, political violence remains a possibility leading up to the poll date. A gun ban will start on January 10, 2016 to reduce election-related violence, but political violence remains a risk.

What happens after the election is also crucial. Whether the new government will continue with the existing economic agenda and anti-corruption efforts remains uncertain. Rodrigo Duterte, the hardline mayor of Davao City, Jejomar Binay, vice president and member of the opposition party, Senator Grace Poe, and presidential-pick Manuel “Mar” Roxas are leading the opinion poll.

Changes of the economic agenda are most likely to come from an administration lead by Binay, who is mired in corruption allegations. If Duterte wins, the country could see a massive police build-up which could deter investors.

Thailand

Thailand will most likely not return to democracy in 2016. While the absence of elections will continue to test voters’ patience, massive violent demonstrations remain a low possibility, but small protests are likely to occur in the short and medium term. The currently ruling junta is likely to continue with what it calls political reforms, including presenting another new Constitution.

Economically, growth is expected to remain sluggish. While the AEC is to become an opportunity for Thai companies and banks to expand in the region, there are widespread fears of new competition in the labour market from outside due to the very low English proficiency in the country. The English abilities of Thais are ranked 14th out of 16 countries in Asia and 62nd out of 70 countries worldwide.

Myanmar

Besides the formation of a new government, the challenges Myanmar faces as it faces the AEC are formidable. Along with Cambodia and Laos, Myanmar has been granted an extension and will not fully join the AEC until 2018, but economists say even this target may be hard to meet as the country’s economic infrastructure remains weak.

Poor infrastructure is a major barrier to competitiveness. Myanmar is rated 145 out of 160 countries in the World Bank’s 2014 Logistics Performance Index – the lowest score in Asia. This will keep putting it at a disadvantage in the region. A lack of skilled labour, combined with outdated economic policies, investment laws and weak law enforcement will set Myanmar back even further, economists say. Much of that wil have to be addressed by the new administration.

Laos

Laos is to chair ASEAN throughout 2016. As a landlocked country, Laos has been an active supporter of regional economic integration. But its ability to lead the regional bloc is undermined by lack of political weight.

Laos is tasked to oversee trade negotiations on some of the most controversial goods and services which were not reached even under the former ASEAN chair, Malaysia, which is considered to have much stronger leadership. Laos also has limited political tools to resolve disputed issues during its chairmanship.

Furthermore, with its close political ties to China underpinned by Chinese infrastructure investment, it may limit Laos’ ASEAN leadership amid rising tensions over competing sovereign claims in the South China Sea and slow down ASEAN’s progress towards achieving a full community. A joint ASEAN stance on the territorial issue is unlikely to happen under Laos’ lead.

Singapore

Singapore’s economy expanded a mere 2 per cent in 2015, the slowest pace in six years. Looking ahead, challenges in the external environment could put more downward pressure on the city state’s economy.

The slowdown in China is expected to further weigh down on Singapore’s overall manufacturing as well as GDP growth, at least for the next six to nine months. Then, it also has to consider the potential drag of higher interest rates arising from the US’ monetary policy normalisation process.

In addition to a cyclical downturn in the global commodity and manufacturing sectors, Singapore’s small and trade-dependent economy is also grappling with a domestic restructuring effort that aims to foster greater productivity-driven growth.

Indonesia

In Indonesia, the main external challenges that are expected to persist in 2016 are further monetary tightening in the US, China’s economic slowdown and low commodity prices. Although the country’s economic growth is projected to accelerate to 5.3 per cent year-on-year in 2016 from 4.7 per cent in 2015 (the fifth consecutive year of slowing gross domestic growth expansion), this growth is primarily caused by improved government spending.

The economy of China has a major impact on the Indonesian economy as China, the world’s second-largest economy, is the key trading partner of Indonesia. With regards to low oil prices, for Indonesia this situation is problematic as the country relies heavily on exports of raw commodities.

Vietnam

Vietnam, in turn, is on an unprecedented growth trajectory. In 2015, the country signed free trade agreements with South Korea and the European Union. Negotiations on the Trans-Pacific Partnership agreement concluded and the AEC was launched. Vietnam posted GDP growth of 6.68 per cent in 2015, the highest in eight years.

Economists expect that the trade agreements and the AEC will help Vietnam boost growth, create new jobs, increase incomes, reduce poverty, stimulate exports, attract foreign investment, restructure its economy, and increase its competitiveness in achieving sustainable growth. Vietnam is implementing a policy of economic transparency and improving its business environment, and restructuring its economy to maintain a 6.5 to 6.7-per cent growth rate over the next five years. A big boost is also expected from the country’s newly opened, booming real estate market.

Cambodia

Global and regional economic dynamics are likely to pose challenges for Cambodia’s economy in 2016, the National Bank of Cambodia said. Robust US growth and the end of low interest rates, economic slowdown in China and Europe, as well as increasing regional competition are expected to test Cambodia’s macroeconomic resilience.

Higher interest rates in the US will strengthen the dollar – and therefore make Cambodia’s dollar-pegged exports internationally less competitive. Adding to this, the increased minimum wage in the garment sector, increased competition after the implementation of the Trans-Pacific Partnership, the free trade agreement between Vietnam and the EU, the economic liberalisation in Myanmar and the AEC all have the potential to weigh on Cambodia’s regional competitiveness. However, GDP growth forecast is still a healthy 6.9 per cent for 2016.

Malaysia

Apart from political turbulence revolving around alleged misuse of state funds by the current government, Malaysia is faced with rapidly rising cost of living. In a situation where the nation’s revenue has shrunk mainly because of the global fall in oil prices, both the public and private sectors will not be able to sustain their current level of employment, and growing unemployment will further erode the economy in a vicious cycle. The new Goods and Services Tax, which was implemented in April last year, also had a negative impact on consumer spending.

Stimulating domestic production, supporting and strengthening the role of small and medium-sized enterprises through assistance for research and development, and enabling cooperatives to participate more meaningfully in various sectors of the economy are measures to be taken to improve the situation, economist believe.

From a peak in the first quarter, private consumption has been steadily falling in tandem with consumer sentiment, with consumer confidence falling to lows seen during the global financial crisis of 2008/2009. The first-half of 2016 could be especially challenging given that households would be facing new rounds of cost pressures from electricity and utilities, as well as from hikes in public transportation fares and highway tolls.

Brunei

Brunei Darussalam is the ASEAN country hardest hit by low oil prices and will have to completely restructure its economy if this low price level is to persist. Due to failed diversification efforts, there is not much other industry than oil on which Brunei could build to retain its wealth. The country is already running big budget deficits and is facing its fourth year of economic depression in 2016. See the full analysis here.